1) The Fisher Effect predicts that an increase in expected inflation will lower the
interest rate on bonds.
2) All nationally chartered banks are required to be members of the Fed.
3) Financial innovation has provided more options to both investors and borrowers.
4) Money markets are referred to as retail markets because small individual investors
are the primary buyers of money market securities.
5) About 95% of orders to buy or sell on the NYSE are executed using SuperDOT.
6) Because of the adverse selection problem, lenders may refuse loans to individuals
with low net worth.
7) “Short selling” refers to the practice of buying a stock and holding it for only a short
time before selling it.
8) An open market sale leads to an expansion of reserves and deposits in the banking
system and hence to a decline in the monetary base and the money supply.
9) Increased demand for a country’s exports causes its currency to depreciate.
10) An additional perk of a private equity firm is that the profits for both CEOs and the
partners are taxed at the 15% capital gains rate rather than the 35% rate they would
suffer if the income was received as income.
11) Critics of the current system of Fed independence contend that the president has too
much control over monetary policy on a day-to-day basis.
12) Mortgage interest rates loosely track interest rates on three-month Treasury bills.
13) If the security markets are truly efficient, there is no need to pay for help selecting
securities.
14) Revaluation of a currency’s value occurs when
A) a floating exchange rate adjusts upward
B) a floating exchange rate adjusts downward
C) a fixed exchange rate is adjusted upward
D) a fixed exchange rate is adjusted downward
15) Which proposal for insuring that sufficient funds will be available to provide Social
Security benefits to future retirees does the AARP find least objectionable?
A) Raise the maximum income cap on which workers and employers are taxed
B) Provide more generous annual cost of living increases
C) Privatize Social Security
D) Lower immigration restrictions to increase the number of workers paying into the
Social Security system
16) Commercial and farm mortgages, in which property is pledged as collateral,
account for
A) one-quarter of borrowing by nonfinancial businesses
B) one-half of borrowing by nonfinancial businesses
C) one-twentieth of borrowing by nonfinancial businesses
D) two-thirds of borrowing by nonfinancial businesses
17) Charles Keating
A) was allowed to acquire Lincoln Savings and Loan of Irvine, California, even though
he had been accused of fraud by the SEC only four-and-a-half years earlier
B) fired Lincoln’s conservative lending officers and internal auditors, even though he
had promised regulators he would keep them
C) enlisted the help of five senators to delay the seizure of Lincoln’s assets
D) did all of the above
18) Compared to money market securities, capital market securities have
A) more liquidity
B) longer maturities
C) lower yields
D) less risk
19) Often investment bankers will form a group, each one buying only a portion of the
new securities to be issued. Such a group is called an underwriting ________.
A) alliance
B) syndicate
C) association
D) guild
20) In the Bretton Woods system, the anchor currency was the
A) euro
B) British pound
C) German mark
D) U.S. dollar
21) A call option gives the seller the ________ to ________ the underlying security.
A) right; sell
B) obligation; sell
C) right; buy
D) obligation; buy
22) With an interest rate of 6 percent, the present value of $100 received one year from
now is approximately
A) $106
B) $100
C) $94
D) $92
23) Mutual funds
A) pool the resources of many small investors by selling these investors shares and
using the proceeds to buy securities
B) allow small investors to obtain the benefits of lower transaction costs in purchasing
securities
C) provide small investors a diversified portfolio that reduces risk
D) do all of the above
E) do only A and B of the above
24) Which of the following is not one of the eight basic facts about financial structure?
A) Debt contracts are typically extremely complicated legal documents that place
substantial restrictions on the behavior of the borrower
B) Indirect finance, which involves the activities of financial intermediaries, is many
times more important than direct finance in which businesses raise funds directly from
lenders in financial markets
C) Collateral is a prevalent feature of debt contracts for both households and businesses
D) New security issues is the most important source of external funds to finance
businesses
25) As a result of the subprime collapse, the demand for low -quality corporate bonds
________, the demand for high-quality Treasury bonds ________, and the risk spread
________.
A) increased; decreased; was unchanged
B) decreased; increased; increased
C) increased; decreased; decreased
D) decreased; increased; was unchanged
26) To prevent the moral hazard problem, health and life insurance companies may
write policies
A) that increase benefits dramatically once the policyholder is discovered to have
contracted an illness so that the patient can recover sooner
B) containing provisions which either reduce or eliminate benefits to persons who
contract prespecified illnesses
C) boosting the amount the companies will pay health providers in the event that claims
are submitted by policyholders
D) with only A and B of the above provisions
27) Which of the following are TRUE of coupon bonds?
A) The owner of a coupon bond receives a fixed interest payment every year until the
maturity date, when the face or par value is repaid
B) U.S. Treasury bonds and notes are examples of coupon bonds
C) Corporate bonds are examples of coupon bonds
D) All of the above
E) Only A and B of the above
28) In recent years
A) interest rates have remained constant
B) the success of financial institutions has reached levels unprecedented since the Great
Depression
C) stock markets have crashed
D) all of the above
29) The bond markets are important because
A) they are easily the most widely followed financial markets in the United States
B) they are the markets where interest rates are determined
C) they are the markets where foreign exchange rates are determined
D) all of the above
30) Mean reversion refers to the observation that
A) stock prices overact to news announcements
B) stocks prices are more volatile than fluctuations in their fundamental value would
predict
C) stocks with low returns are likely to have high returns in the future
D) stocks with low returns are likely to have even lower returns in the future
31) A decrease in the foreign interest rate shifts the expected return schedule for
________ deposits to the ________ and causes the domestic currency to appreciate.
A) domestic; right
B) domestic; left
C) foreign; right
D) foreign; left
32) ________ was the stock market’s worst one-day drop in history in the 1980s.
A) Black Friday
B) Black Monday
C) Blackout Day
D) none of the above
33) What is the return on a 5 percent coupon bond that initially sells for $1,000 and
sells for $900 one year later?
A) 5 percent
B) 10 percent
C) -5 percent
D) -10 percent
E) None of the above
34) Economies of scale
A) in the financial markets does not explain why financial intermediaries developed and
have become such an important part of our financial structure
B) can be used to an advantage by reducing transaction cost
C) both A and B of the above
D) neither A nor B of the above
35) First National Bank
Table 23.2
Refer to Table 23.2. Assuming that the average duration of the bank’s assets is four
years, while the average duration of its liabilities is three years, a rise in interest rates
from 5 percent to 10 percent will cause the net worth of First National to ________ by
________ of the total original asset value.
A) decline; 5%
B) decline; 1.3%
C) decline; 6.2%
D) increase; 5%
36) (I) Securities that have an original maturity greater than one year are traded in
capital markets.
(II) The best known capital market securities are stocks and bonds.
A) (I) is true, (II) false
B) (I) is false, (II) true
C) Both are true
D) Both are false
37) Holding everything else constant, if the federal funds rate rises, then the demand for
A) excess reserves rises because they have a higher return
B) excess reserves falls because they have a higher cost
C) required reserves falls because the cost of borrowing from the Fed is relatively
higher
D) required reserves rises because the cost of borrowing from the Fed is relatively
lower
E) reserves will not change because the Fed sets the level of required reserves
38) The theory of bureaucratic behavior when applied to the Fed helps to explain why
the Fed
A) is supportive of congressional attempts to limit the central bank’s autonomy
B) is secretive about the conduct of future monetary policy
C) sought less control over banks in the 1980s
D) is willing to take on powerful groups that may threaten its autonomy
39) Which of the following is the largest borrower in the money markets?
A) commercial banks
B) large corporations
C) the U.S. Treasury
D) U.S. firms engaged in foreign trade
40) An open market sale of securities by the Fed will
A) decrease liabilities of the Fed and not affect assets of the banking system
B) decrease assets of the nonbank public and decrease assets of the Fed
C) increase liabilities of the banking system and increase assets of the Fed
D) have no effect on assets of the nonbank public but increase liabilities of the Fed
E) decrease assets of the banking system and increase assets of the Fed
41) Holding all else constant, when a bank receives the funds for a deposited check,
A) cash items in process of collection fall by the amount of the check
B) bank assets remain unchanged
C) bank liabilities decrease by the amount of the check
D) all of the above occur
E) only A and B of the above occur
42) Federal funds
A) are short-term funds transferred between financial institutions, usually for a period
of one day
B) actually have nothing to do with the federal government
C) provide banks with an immediate infusion of reserves
D) are all of the above
E) are only A and B of the above
43) Advocates of Fed independence fear that subjecting the Fed to direct presidential or
congressional control would
A) impart an inflationary bias to monetary policy
B) force monetary authorities to sacrifice the long-run objective of price stability
C) make the so-called political business cycle even more pronounced
D) do all of the above
E) do only A and B of the above
44) When yield curves are steeply upward-sloping,
A) long-term interest rates are above short-term interest rates
B) short-term interest rates are above long-term interest rates
C) short-term interest rates are about the same as long-term interest rates
D) medium-term interest rates are above both short-term and long-term interest rates
E) medium-term interest rates are below both short-term and long-term interest rates
45) Which of the following are true of mortgages?
A) A mortgage is a long-term loan secured by real estate
B) A borrower pays off a mortgage in a combination of principal and interest payments
that result in full payment of the debt by maturity
C) Over 80 percent of mortgage loans finance residential home purchases
D) All of the above are true of mortgages
E) Only A and B of the above are true of mortgages
46) Which of the following are investment intermediaries?
A) Finance companies
B) Mutual funds
C) Pension funds
D) All of the above
E) Only A and B of the above
47) The day-to-day liquidity needs of credit unions are met by the ________.
A) National Credit Union Administration
B) Federal Reserve System
C) state central credit unions
D) Central Liquidity Facility
48) In the long run, a rise in a country’s price level (relative to the foreign price level)
causes its currency to ________, while a rise in the country’s relative productivity
causes its currency to ________.
A) appreciate; appreciate
B) appreciate; depreciate
C) depreciate; appreciate
D) depreciate; depreciate
49) If a $10,000 face value discount bond maturing in one year is selling for $5,000,
then its yield to maturity is
A) 5 percent
B) 10 percent
C) 50 percent
D) 100 percent
50) According to the expectations theory of the term structure,
A) yield curves should be equally likely to slope downward as to slope upward
B) when the yield curve is steeply upward-sloping, short-term interest rates are
expected to rise in the future
C) when the yield curve is downward-sloping, short-term interest rates are expected to
remain relatively stable in the future
D) all of the above
E) only A and B of the above
51) The official reserve transactions balance
A) equals the current account balance plus the items in the capital account
B) tells us the net amount of international reserves that must move between central
banks in order to finance international transactions
C) has an important impact on the money supply
D) is all of the above
52) A major controversy involving the U.S. banking industry in its early years was
A) whether banks should both accept deposits and make loans or whether these
functions should be separated into different institutions
B) whether the federal government or the states should charter banks
C) what percent of deposits banks should hold as fractional reserves
D) whether banks should be allowed to issue their own bank notes